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The global financial institution says Canada’s GDP will grow at 2.5 per cent, up 0.6 percentage points from its April forecast. But it cut its projection for growth next year to 1.9 per cent from 2.0 per cent on expectations that interest rate hikes will dampen housing and debt-financed consumer spending.

The IMF report added momentum to the loonie, which broke through the 80 cents U.S. threshold mid-day Monday for the first time in more than a year, before closing at 79.92 cents U.S.

Mounting evidence of an economy picking up steam has increased the probability that Canada’s central bank will raise borrowing rates again this year after a 25 basis point increase in July to 0.75 per cent.

“Growth in 2018 is a victim of our success in 2017,” said Avery Shenfeld, chief economist at CIBC Capital Markets. “As we get to full employment, the Bank of Canada will be actually trying to ease growth a bit in order to prevent inflation from breaking out.”

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He said GDP growth in 2019 “might have to be a bit slower still unless output per worker picks up.”

Consumer spending, housing starts and a strong turnaround in business investment fuelled a 3.7 per cent annualized growth rate in the first quarter and RBC chief economist Craig Wright said rising investment and government spending on infrastructure has the economy on track to grow at nearly double the average pace of the previous two years.

“While we don’t discount the risk of a slowdown resulting from the pending renegotiation of NAFTA or the expected cooling of the housing market,” Wright said, “we remain confident the economy will continue to grow at an above-potential pace for the remainder of this year.”

The IMF revised its 2017 outlook for Canada following strong growth in the first quarter and indications of “resilient second-quarter activity." Growth forecasts for Japan and China this year were also bumped up slightly.

The IMF expects European countries including Germany, France and Italy to grow faster in 2017 than earlier predicted, but kept its forecast for global growth unchanged at 3.5 per cent for 2017 and 3.6 per cent for 2018.

“The recovery in global growth that we projected in April is on a firmer footing; there is now no question mark over the world’s gain in momentum,” said the IMF’s chief economist Maurice Obstfeld.

“Recent data point to the broadest synchronized upswing the world economy has experienced in the last decade.”

But while the Canadian outlook has improved, the IMF downgraded its forecast for Canada’s largest trading partner.

The IMF lowered its United States forecast to 2.1 per cent for this year and the next, down from the 2.3 per cent for 2017 and 2.5 per cent for 2018 that it had predicted in April.

That also compares with the 3 per cent growth U.S. President Donald Trump has targeted since assuming office, through a combination of tax cuts, deregulation and infrastructure spending. Tax reductions and spending have been stalled by politics.

“The major factor, especially for 2018, is the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of U.S. fiscal policy changes,” the IMF said in its latest World Economic Outlook.

The downgrade comes as the U.S. prepares to release its growth numbers for the second quarter this week, with economists predicting growth improved to 2.7 per cent.

Economists said the weakening U.S. outlook along with soft oil prices and the impact on exports of a rising dollar are among the key threats to Canada’s growth forecast.

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